Two Stock Picks in Light of the Xbox One Misstep

If you're looking to buy into video game trends, here are some ideas to keep in mind.

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When Microsoft (NASDAQ:MSFT)announced plans for releasing the Xbox One, a successor to the Xbox 360, it was revealed that the new console will not run Xbox 360 games. The reason was that the Xbox 360 is built on an x86 architecture. The Xbox One will rely more heavily on new processors and the "cloud."

Consumers are not entirely fooled by the explanation, specifically with the reliance on the cloud architecture. Once the Xbox One is discontinued, consumers run the risk of losing support for the games they purchase. Current Xbox 360 owners also have less incentive to buy the new console, since their game purchases will no longer work. Even Xbox Live Arcade ("XBLA") games will not be transferrable to the new console.

The lack of backwards support may not be entirely negative on future console sales. Nintendo (OTCMKTS:NTDOY)made some games backwards compatible with the Wii U, through a virtual console. Investors are upbeat on the Xbox One announcement. Shares are up more than 20% in a one-year period, compared to a loss for shareholders of Nintendo:

Investors who missed the run-up in Microsoft should wait for shares to pull back. The Xbox One may experience a slow initial uptake in sales. If the XBLA store supported the Xbox One, current Xbox 360 owners would not be hesitant in upgrading. The move could benefit Sony (NYSE:SNE) and would help lift sales of the PlayStation 4:

Game makers are also up strong in the last two months. Electronic Arts (NASDAQ:EA), Activision (NASDAQ:ATVI),and Take-Two (NASDAQ:TTWO) are all up this year. Recently, however, the optimism is waning: Activision dropped around 7% in the last week:

By contrast, Zynga (NASDAQ:ZNGA)and Glu Mobile (NASDAQ:GLUU) are not getting much attention from investors. These companies are in transition, looking to produce better game titles for mobile devices at a profit.

Valuation, Sorted by Price to Sales

Conclusion

Investors should not be buying into the console refresh. Nintendo moved higher ahead of the console release, only to see its share price falter.

Editor's note: This article was written by Chris Lau, Kapitall Contributor.

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